Eating out isn’t getting cheaper despite the reduction in Goods and Services Tax (GST) rate to 5% for restaurants, thanks to eateries not passing on the reduced rates to diners in its entirety. Instead, some of them have increased the base price of menu items due to the removal of the Input Tax Credit (ITC) that allowed them to offset some of the costs of raw material.
For instance, during the 18 per cent GST regime, a regular Latte at a McCafe outlet in Mumbai was priced at Rs 142 (base rate of Rs 120.34 + Rs 10.83 each for central and state GST).
Under the new 5 per cent rate, the price of the beverage should have come down by Rs 15.60 to Rs 126.
Instead, McCafe, which is part of the McDonald chain of restaurants operated by Westlife Development Ltd (WDL), has hiked the base price of the beverage to Rs 135.24, which means buyers continue to pay the same Rs 142 even after adding in the reduced 5 per cent GST charge. This also allows the restaurant to keep the difference of Rs 16 in the base price for itself.
“The government has brought down GST from 18% to 5%, but there has been a removal of input tax credit (ITC). Due to this, our operating costs have gone up by 10-12 per cent. However, at McDonald’s, we believe in giving the best value to our customers, and have passed on the benefits wherever we could,” a spokesperson for WDL told DNA.
At Mumbai-based Sanjiv Kapoor Restaurants (SKR) – which operates 75 restaurants in 10 countries – chief executive officer Rajeev Matta said the chain was passing on benefits of the lower GST rate to customers.
“Earlier, on a normal bill after adjusting for the ITC, restaurants were effectively paying 12% to the government. Now, without ITC, we pay 5%. Overall there is a benefit to both sides,” Matta told.
Matta pointed out that the loss from ITC, especially on capital expenditure or rentals, is likely to be made up by greater volumes as consumers take advantage of the lower tax rate.
According to industry experts, the reason for withdrawing the ITC benefit stems from the fact that its benefits weren’t being passed on to consumers. “It has understood the big reason and that was the rate. Once the rate has been slashed to 5% for all categories and ITC benefit withdrawn, they have addressed both issues,” said a top executive from a leading restaurant chain in Mumbai.
Other restaurateurs, however, say they will have to resort to “other means” to remain profitable.
Calling the rate cut an “eyewash” for customers, Varun Puri, proprietor of Too Indian restaurant in West Delhi, said consumers would end up paying the same amounts as before once eateries increase prices. “This is only a momentary relief because we will have to do this to keep our operations running,” he told media.
Managing committee members of the National Restaurant Association of India (NRAI) on Tuesday met with Maharashtra finance minister and GST commissioner Rajeev Jalota to express their concerns over removal of ITC and its resultant losses by way of capex and rentals.
“Government officials have invited suggestions on how to address this issue and have asked NRAI to submit possible measures,” a top restaurateur said, declining to be named.